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Facts about negative wholesale electricity prices and the Production Tax Credit

Facts about negative wholesale electricity prices and the Production Tax Credit

The federal wind energy Production Tax Credit (PTC) does not have a major impact on real-time wholesale electricity prices. The PTC incentivizes the up-front capital investments that make new wind farms possible in an intensely incentivized energy market. It helps keep 75,000 people employed even during the economic recession, and encourages a diverse energy portfolio that is in the national interest. But with or without the PTC, wind energy is going to enter the real-time electricity market as one of the lowest-cost sources of electricity.

Utility system operators choose which power plants operate in real time, based on the marginal operating cost of each plant. That is typically the cost of fuel plus any variable operations and maintenance costs.  Up-front capital costs and fixed O&M costs–which are obviously key factors in determining the long-term competitiveness of different energy technologies–are expressly excluded. Because wind energy has no fuel cost and extremely low variable O&M costs, even without the PTC wind energy would enter into the market at close to $0/MWh. Thus, the PTC itself has very little effect on real-time electricity prices.

Electricity prices have been going negative in some parts of the country for decades, long before the large-scale introduction of wind energy, because nuclear generation would often exceed electricity demand at night and nuclear plant operators were unable to turn down their plants’ output.  Like wind, nuclear plants also bid into the real-time market at very low costs because their fuel and variable O&M costs are very low, even though their capital costs and fixed O&M costs are sizable. Wind with the PTC, wind without the PTC, and nuclear all have a similar impact on the electricity market.

Fossil-fueled power plants almost always set the real-time price of electricity. Because utility system operators decrease the output of the most expensive power plants first, wind and nuclear plants are usually the last power plants to have their output turned down. As a result, these plants seldom set the market price for electricity. Isolated cases in which wind has caused electricity prices to go negative have been caused by a lack of transmission capacity to move that wind energy to consumers, yet that problem is already being addressed by long-needed upgrades to our power grid. Thus, concerns that wind is causing widespread or frequent instances of zero or negative electricity prices are unfounded.

Wind’s impact on lowering electricity prices by offsetting the most expensive fossil-fired power plants is a major benefit to consumers, because it translates into lower electric bills. With or without the PTC, adding wind energy to the utility system displaces the most expensive power plant that is currently operating, resulting in significant electricity price reductions for consumers. For more on the consumer savings benefit of wind energy, see this May 2012 report from Synapse Energy Economics: http://cleanenergytransmission.org/new-study-finds-wind-power-can-save-midwestern-consumers-between-3-and-9-5-billion-annually-by-2020/ . If the price of electricity does fall too much, whether because of the introduction of wind energy or another low-marginal-cost energy source like nuclear, that can disincentivize construction of new power plants. That is best addressed with changes to the electricity market design, to ensure that power plant owners are being paid for all of the services they are providing.

Low or negative electricity prices are actually a positive tool in an efficient electricity market, and a sign that the market is working efficiently. Low or negative electricity prices send price signals to fossil-fired power plants that they should reduce their output and save fuel, which is an efficient market outcome. Low or negative electricity prices also create an incentive for large electricity users, like factories, to shift their demand from day to night. They also incentivize fossil power plant owners to take steps to make their power plants more flexible, so that they can reduce their output more at night.

Fossil and nuclear energy resources are also incentivized, including sizeable taxpayer payments written into the permanent tax code and the omission of pollution costs from their price. One could argue those incentives distort the market by allowing fossil and nuclear energy to bid into the electricity market at lower prices than they would without those incentives.  Because fossil-fired power plants typically set the marginal price of electricity, those policies have a far greater effect on depressing power prices than the PTC does.

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Michael Goggin is Vice President at Grid Strategies LLC, a DC-area consulting firm working on grid and markets issues for clean energy clients including AWEA. He was previously head of Research at AWEA.

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